Summer Reading: Food for Thought on the Future of European Payments, Contributed to the EPC Newsletter by Experts Representing Various Market Segments

In January 2009, the European Payments Council (
), representing the European banking industry in relation to payments, launched the free online
Newsletter. Issued quarterly, it reports on
activities and latest developments in the Single Euro Payments Area (
). In addition, the newsletter serves as a platform offering food for thought on a range of payment topics which have been contributed by professionals representing various stakeholder groups including payment service users, and regulators, as well as payment and other service providers.

The European Union (
) authorities driving the
process have clarified that migration to harmonised
payment schemes and technical standards, as mandated by
law, does not conclude this
integration project.
remains a work in progress and, consequently, various regulatory initiatives intended to bring about ‘
2.0’ are now in the pipeline. (The July 2014 edition of the
Newsletter offers an overview of these initiatives.)

This blog highlights contributions to the
Newsletter from experts in the field commenting on the factors that promote further integration of and innovation within the payments market. Readers who have not yet had the opportunity to explore the fresh perspectives offered by the articles cited might consider adding these to their summer reading list. The links to the
Newsletter articles mentioned in this blog are included in the ‘related links’ below.

(Please note that the views expressed with the articles cited in this blog are solely those of the authors and should not be attributed to the
.)

From theory to practice and what comes next? Challenges and opportunities after more than a decade of
in the making. A commentary: “Like all major new economic initiatives,
needs time to find its feet and achieve all it set out to accomplish”. By Paul Thomalla

In this article published with the April 2014 edition of the
Newsletter, Paul Thomalla analyses the challenges and opportunities that materialised for stakeholders on both the demand and supply sides with the roll-out of the
project since the
institutions introduced the concept of harmonised electronic euro payments in the late 1990s. “From the outset,
has been and is a good idea,” he says. “Yet as with most things, a good idea on paper is easier to conceive than create.”

“Like all major new economic initiatives,
needs time to find its feet and achieve all it set out to accomplish”, Thomalla says. 14 years post-inception, the story of
(and its potential future) is far more complicated and multi-layered than anyone would have imagined. In a post-
migration world the focus will need to be on reducing the layers and the friction that those layers cause. He suggests considering, among other things, the following when discussing the next steps:

When it comes to sovereign governments and their central banks, there was always going to be a degree of vested interest, which we have seen to a certain extent. To ensure their financial institutions use
to their advantage, and are given the best opportunity to compete,
legislative acts relevant to
have been tweaked, altered and amended slightly on a nation-by-nation basis. Nothing too dramatic, but if an institution has payments interests across these different countries, then it needs to create one solution for one country, and then alter it, no matter how slightly, to fall in line with another country. This drip feed approach has invariably made it more difficult for the payments industry to get this worked out.

can bring enormous benefits when it starts to come into play. Added flexibility and faster payments will, in the long run, lead to new revenue opportunities. Though the new revenue streams may not be clear at the moment, a basic principle of economics is that the more volume you can handle, the better your margins, and
allows for just that. Bolting on real-time information and notifications, additional security packages and providing a better consistency means institutions will be able to differentiate more easily and offer premium services based on the volumes handled.

With migration to
in the euro area complete, Thomalla concludes: “It would be difficult for anyone to comprehensively predict what a post-
migration world will look like. What we can be sure of is that after a sometimes exhausting process, there will be a more nimble and responsive payments industry.”

Paul Thomalla is SVP EMEA and Managing Director at ACI Worldwide.

The future of payments: markers for success. The six markers which payments incumbents and newcomers alike can use to define positioning and strategies for successful innovation. By Monica Adractas, Dan Ewing, Kausik Rajgopal and Wouter De Ploey

In this article published with the January 2013 edition of the
Newsletter, Monica Adractas, Wouter De Ploey, Dan Ewing and Kausik Rajgopal introduce six markers that payments incumbents and newcomers alike can use to define positioning and strategies for successful innovation. They can help incumbents adapt current value propositions, (or create more defensible ones), and guide industry entrants in their efforts to make sustainable inroads. The authors state: “Each of these markers is anchored in our beliefs about the enduring nature of the payments business, as well as in our thinking about current industry disruptions. The six markers for success defined here can serve not only as reliable markers to guide incumbents as they evolve their business strategies and create new value propositions, but also to guide those entrants eager to tilt at the payments windmill.” The markers for success identified by the authors are:

Monica Adractas is an associate principal, Dan Ewing is a senior expert, emerging payments and Kausik Rajgopal is a director, all in McKinsey's San Francisco office. Wouter De Ploey is a director in McKinsey's Antwerp office.

The concept of an open standard interface for controlled access to payment services (CAPS). A commentary: “Access to accounts – why banks should embrace an open future.” By Michael Salmony

In his article published with the January 2014 edition of the
Newsletter, Michael Salmony provides a fresh perspective on the access to accounts initiative proposed by the European Commission. Specifically, Salmony outlines his concept of an open standard interface for controlled access to payment services (CAPS).

CAPS are in contrast to current practices where the users’, i.e. payers’, full online banking credentials are passed on to third party service providers (
) allowing them potentially full access to everything on the account: past history, salary incomes, security settings etc. It cannot be in the interests of the user and of a secure financial ecosystem to allow access to an account (often referenced as ‘XS2A’), this author argues. Instead, one should insist only on certain secure CAPS.

Several options exist to physically implement such a standard interface, ranging from a pan-European standard application programming interface (
) across all banks to local solutions. In the interest of
developers and in line with the
vision, the variability of standards across Europe should be minimised. A developer should be able to write an application that works across all European banks in a harmonised way (avoiding individual interfaces for each of the approximately 7,000 banks). The
should contract with contract aggregators, speaking for and bundling banking groups across Europe, to avoid having to negotiate with each bank individually. CAPS can provide some cornerstones of a framework within which the full potential can be unlocked. The following prerequisites must be met to make CAPS a success:

Third parties need to be certified and regulated, e.g. by the forthcoming revised Payment Services Directive (
). (The European Commission introduced its proposal for
in July 2013.)

There need to be contracts with banks and merchants in place that clarify the liability partitions.

The system needs to be secure, handling access to accounts in a controlled way with authentication being given only for specific accesses.

Transactions need to be entirely controlled by consumers to avoid a situation where consumer account data is exploited without permission.

There needs to be a fee to be determined by market forces attractive enough for all parties, including merchants, banks and
, to provide the infrastructure, develop innovative services and offer customer support.

Salmony concludes: the regulator will enforce open access to bank accounts (although he still has to set some boundary conditions for success). If open access is an inevitable step, then banks should act now to secure a vital role in the future of payments. It is better to disrupt yourself rather than to let others disrupt you. It is not about fighting for a larger slice of a given pie, but about jointly growing the cake with the potential to make all parties better off. Let a fair and safe infrastructure develop and everybody wins.

Michael Salmony is Executive Adviser at Equens SE. He also represents individual countries, banking consortia and international industry sectors, respectively, within such bodies as the European Commission, the
and the European Association of Co-operative Banks. Previously, he was responsible for the application of innovation to business value at IBM. Today, he focuses on the internet and financial services space.

Card interchange fees Regulation: What is the right question? A commentary on the European Commission proposal for a new Regulation on interchange fees for card-based payment transactions. By Norbert Bielefeld

On 24 July 2013 the European Commission published a ‘payments legislative package’, which includes the Commission proposals for
and a new Regulation on interchange fees for card-based payment transactions (the interchange fees (IFs) Regulation). The Commission stated that the IFs Regulation, “combined with the revised PSD, will introduce maximum levels of interchange fees for transactions based on consumer debit and credit cards and ban surcharges on these types of cards.” The Commission further commented: “The level of the interchange fees varies widely between the [
] Member States, which suggests that they do not have a clear justification and create an important barrier between the national payment markets.” (Commission press release, entitled ‘New rules on payment services for the benefit of consumers and retailers’, 24 July 2013.)

In his article published with the January 2014 edition of the
Newsletter, Norbert Bielefeld analyses the stated rationale (i.e. alleged market failure) for and the effectiveness of the proposed IFs Regulation to achieve the outcome (i.e. further integration of the
payments market) pursued by the Commission. Taking into consideration relevant developments globally, this author finds: card interchange fees do not cause market failure – at least as far as debit cards are concerned. If one truly wanted to pursue a ‘single market’ goal, which in this respect would translate into similar or at least more homogeneous usage rates for debit cards across
Member States, one would have to look at a number of factors other than card interchange fees.

He points out: available data indicates that the greater or lesser acceptance of debit cards is neither the outcome of a lower nor a higher level of interchange fees. Card interchange fees therefore, are not the cause for market fragmentation (which translates into ‘market failure’ in the view of the Commission) – at least as far as debit cards are concerned. If further integration of the
payments market is the political objective, it is questionable whether the proposed IFs Regulation can be instrumental to harmonise other factors relevant in this regard, i.e. legacy legislation and practices for all payment instruments and their respective pricing or cross-subsidisation, market structure, the role of cash including the size of the grey economy, and consumer behaviour and preferences across the
Member States. It should also be noted that the setting of a similar cap for debit card interchange applying across all
Member States, for example, will have vastly different impacts not only on the use of debit cards, but also on other payment instruments, in each of the Member States.

Bielefeld concludes: the interchange fee regulation debate in the
, as with much of the payments legislation debate, tends unfortunately to take place in isolation from developments outside Europe. Taking into consideration global developments suggests that payment systems are more efficient in countries outside the
which are less encumbered by payments legislation.

Norbert Bielefeld is Deputy Director - Payment Systems with the European Savings and Retail Banking Group (ESBG) and World Savings and Retail Banking Institute (WSBI). He is Chairman of the board of Trionis, a processing company. He serves as a member of various
bodies including the
Cash Working Group. The ESBG is a member of the
. (The views expressed in this article are those of the author and may not necessarily represent the views of all ESBG members.)

On integration and innovation: reflections of a banker

The
Newsletter (naturally) also features opinions with regard to the integration of and innovation within the European payments market reflecting the perspective of a banker. (A selection of these articles is also included with the ‘related links’ below.) Günther Gall, former Vice Chair of the
and a banker with more than forty-five years of experience in all aspects of payments, identifies the following key factors with his commentary, entitled ‘What drives innovation in payments?’:

To generate the substantial resources required within a company to develop a new solution and bring it to market, developers must demonstrate that there is market demand for this solution.

Alternatively, the developer must demonstrate that the new solution is very likely to generate market demand in the future. This scenario was illustrated by Steve Jobs, who said: “We are not going to wait for customers to tell us what they want. We are going to introduce what we think is in their best interest, and they will learn to love it.” Identification of future market needs is an art form for which there is no recipe (otherwise there would be no brand or business failures). See also item four in this list.

The competitive advantage to be generated with a new solution must be clearly identified, through analysis of competitors’ existing offerings, or based on confirmation that the market to date does not yet provide the new solution considered for development.

The solution must be convenient and easy to use for the customer, especially in payments.

Bringing innovative solutions to market in a network industry may require cooperation between providers. If such cooperation in the non-competitive space is restricted by regulators, it is impossible to bring such solutions to market.

There must be a business case for providers to develop a new solution. Payments are not a commodity, but a commercial offering.

The author of this blog has frequently commented that
market integration is not the result of market forces. It requires the political will and mandate to achieve it. Regulatory intervention should be restricted to setting the conditions required to execute and conclude the integration exercise.
– or integration – is however not an end in itself. It is an interim stage that should not be judged on the direct outcomes, but on the situation it leaves for the market to reap further benefits including, for example, innovative solutions being brought to market.

However, the ingenuity, inventiveness and readiness to develop new products and services cannot be decreed by law. “Innovation is the multi-stage process whereby organisations transform ideas into improved products, service or processes, in order to advance, compete and differentiate themselves successfully in their marketplace” (Baregheh A, Rowley J and Sambrook S. (2009) Towards a multidisciplinary definition of innovation, Management decision, vol. 47, no. 8, pp. 1323-1339). Innovation will disappear without the right incentives, due to the effort and resources required to transform a new idea into a product or solution.

The
authorities currently in the process of defining the regulatory framework impacting the future evolution of the European payments market are invited to consider the principal observations identified by the market experts cited in this blog when negotiating the details of the payments-related legislative proposals now on the table.

Last but not least, the authorities might take into account the latest comprehensive central bank research. In order to obtain an overview of payments innovation globally, the Committee on Payments and Settlement Systems (CPSS), established the Working Group on Innovations in Retail Payments (the Working Group). The Working Group focused on fact-finding, in order to define the most relevant developments and to identify the major factors driving and hampering innovation. In 2012, the CPSS published the report ‘Innovations in Retail Payments’. In his related article in the
Newsletter, Dirk Schrade, Chairman of the Working Group, discusses the trends and findings reflected in the report, which contains a number of elements geared to assessing how an innovation-friendly environment should look.

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